Misplaced ambitions amid rising prices, unemployment and insurgency…

Will the Pakistan budget be able to appease frustrated Pakistanis hit by food inflation, unemployment and tax hikes seen as helping fuel an Islamist insurgency and discrediting civilian authorities? Are its predictions to lower the budget deficit to 4% of GDP realistic or too ambitious?

For the present, the Government has put off hard decisions on spending and revenues for later, as well as almost guaranteeing a continued unpopular IMF bailout. Some experts say that ” this government is surviving not so much because of its popularity but more so by default. The government’s hands are tied and one must not forget, given the fact that we’re in the IMF program, that there is little fiscal space for the government to maneuver. It’s in survival mode.”

World Finance, in a recent article on Pakistan’s budget 2010-11 has commented that Pakistan was on the brink of default when it turned to the IMF in November 2008 for a $10.66bn loan package to help put its economy back on track. It received the fifth tranche of $1.13bn in May. The budget raised taxes on sectors such as capital gains, increased a sales tax and slashed some subsidies on energy and food, while trying to provide some social relief for the roughly third of the 170 million population that lives in poverty.

Key to meeting IMF conditions is cutting the deficit, targeted at 5.1 percent this year and seen as posing a serious inflation risk and hurting the economy just as it tentatively recovers from its lowest growth rate in decades. Pakistan’s tax-to-GDP ratio which is around 9.5 percent, is one of the lowest in the world.

The country’s main stock exchange was unfazed by the budget as analysts said all the measures had been priced in and there were no surprises and the uncertainty was over. The government has targeted 1.778 billion rupees in tax revenue, which is almost 21 percent higher than the current fiscal year’s target, one that is likely to be unmet as well. Pakistan collected 1.026 billion rupees in the first ten months of the 2009/10 fiscal year. Pakistan is also aiming to generate more than 51 billion rupees, which would be 0.3 percent of GDP, from an auction of 3G spectrum licenses that analysts said was unlikely to materialize.

The inflation target of 9.5 percent for fiscal year 2010/11 was unlikely to be met if there were slippages in the fiscal target.